October 19, 2004
A Periodic Wrap-up of the News, Cases, and Rulings that Drive Bad Faith Litigation

Bad Faith Bulletin is produced by Martin & Seibert, L.C. and attorney E. Kay Fuller. Cases are added on a periodic basis, as warranted.

For further information on any decision, contact:

Kay Fuller
Martin & Seibert, L.C.
P.O. Box 1286
Martinsburg, West Virginia 25402
(304) 262-3209
(304) 267-0731 fax [email protected]

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deposition, policyholder
bad faith litigation, delayed payment,
refused to pay, fraud, investigation


The West Virginia Supreme Court of Appeals has held that the acts of defense counsel may not be imputed to the insurance carrier in a “bad faith” action. However, the Court has ruled that post-litigation conduct is actionable under the Unfair Claims Settlement Practices Act. These issues were addressed in answering a certified question from the United States District Court for the Northern District of West Virginia in Barefield v DPIC Companies, Inc., (W.Va., No. 31226, filed June 25, 2004). In a companion opinion, however, the Court held that an insurance carrier can be held liable for its own actions that violate the Unfair Claims Settlement Practices Act when the insurer knowingly encourages, directs, participates, relies upon or ratifies wrongful conduct by a defense attorney hired by the carrier to represent an insured in Rose v St. Paul Fire & Marine Ins. Co. (W.Va., No. 31317, filed June 25, 2004).

The Court refused to impute the actions of defense counsel finding that a defense attorney employed by an insurance company to represent an insured in a liability matter is not engaged in the “business of insurance” and therefore falls outside the scope of the Unfair Trade Practices Act. The holding in Rose, however, was limited to “an independent attorney” and did not consider factual circumstances whereby an attorney is hired to investigate or give advice on the validity of a claim similar to a claim representative, where the attorney is retained to defend the interests of the insurance carrier, or the application to in-house or counsel or captive law firms.

Syl. Pt. 6 of Rose states, however, that a claimant can establish a violation of the UTPA by showing that an insurance company, through its own actions, breached its duties under the Act by knowingly encouraging, directing, participating in, relying upon, or ratifying wrongful litigation conduct of a defense attorney hired by the insurance company to represent an insured. This Syllabus Point seems to call into play whether the attorney-client privilege would be waived so that a claimant could determine whether the insurance company knowingly encouraged, directed, participated in, relied upon or ratified wrongful litigation conduct.

Turning to the second question, the Court held that nothing in the UTPA would indicate that the scope of the Act ceases once litigation is filed, concluding that the Legislature intended to regulate the actions of companies and individuals in the business of insurance before and after the initiation of a lawsuit. In a dissenting opinion, Justice Maynard found that holding an insurer potentially liable for the actions of defense counsel is “devoid of common sense.” He argued that the decision infringes on the constitutional right of access to the Courts and seriously compromises the ability of insurers and insureds to defend themselves in claims brought by third-party claimants concluding: “In effect the de facto rule now is that parties in litigation, with the exception of insurers and insureds, have a right to zealous representation.” (emphasis in original). Martin & Seibert, L.C. representing Progressive Paloverde Insurance Company, filed an Amicus Brief in the Rose appeal.


In reversing a $39 million “bad faith” verdict, the West Virginia Supreme Court of Appeals has held that it is reversible error to peremptorily charge a jury that it shall or should find punitive damages. The Supreme Court reversed the verdict of Kocher v Oxford Life Ins. Co., (No. 31539, W.Va., filed June 17, 2004), finding that the jury was incorrectly instructed that it had no discretion with respect to an award of punitive damages. Therefore, the $34 million punitive damages award was vacated and the case remanded for a new trial on that issue.

The Kocher case gained notoriety when the plaintiff was denied disability benefits under a credit life and disability insurance policy the plaintiff purchased when he bought a truck from a Wetzel County dealership. The plaintiff was severely injured in 1999 and ultimately had his right leg amputated below his knee. Oxford denied the claim and during the course of the “bad faith” suit, its Senior Vice- President posed as a Fed-Ex employee to get directions to the plaintiff’s home and thereafter visited the plaintiff in an attempt to settle the claim. As a result, the Circuit Court struck Oxford’s defenses and granted judgment to the plaintiff on liability, permitting the case to be tried only on damages. On the issue of punitive damages the Court instructed the jury - over Oxford’s objection - that it would be the jury’s “duty to assess punitive damages.”

Justice McGraw dissented arguing that the message sent by the majority opinion is “if you are big enough, you can pretty much do what you want.”


In reversing a verdict against State Farm in a third party “bad faith” claim, the West Virginia Supreme Court has held that liability is “reasonably clear” for purposes of the Unfair Claims Settlement Practices Act when “a reasonable person, with knowledge of the relevant facts and law, would conclude, for good reason, that the defendant is liable to the plaintiff.” Finding that the Circuit Court of Brooke County used the wrong legal standard in determining whether liability was reasonably clear and improperly ruled on the issue as a matter of law rather than presenting the issue to the jury, the Supreme Court vacated the verdict and ordered a new trial in Jackson v State Farm, (Nos. 31372 and 31643, W.Va., filed July 2, 2004).

The Court specifically found that a reasonable jury could draw different conclusions on the issue of whether State Farm’s insured’s liability was reasonably clear in a two- vehicle collision which led to the “bad faith” suit. Thus, a fact question was presented and it was improper for the trial Court to rule as a matter of law that State Farm violated the Unfair Claims Settlement Practices Act. The Court also held it was error for the trial court to rule as a matter of law that State Farm failed to conduct a reasonable investigation as required by the Act finding that the reasonableness of an investigation is also a jury question because jurors can reach different conclusions from the evidence.

The Jackson Court also overruled the ruling of the Circuit Court that it could impose liability against State Farm after the jury in the tort claim returned a verdict contrary to the liability assessment of the claims department. State Farm had analyzed liability on its insured up to 60%. A jury ultimately found the insured to be 90% liable. Therefore, the trial court held that State Farm was liable for violations of the Act at least as of the date of the jury verdict. Relying upon cases in other jurisdictions, Justice Starcher, writing for the majority, found that the issues to be determined in a “bad faith” claim do not concern the insured’s actual liability. The insurer’s settlement practices could be “entirely without fault” yet the insured be found liable. What matters in the “bad faith” case, the Court held, is the insurer’s actions. “So long as the insurer acts in good faith, the insurer is not held to standards of omniscience or perfection; it has leeway to use, and should consistently employ, its honest business judgment.”

The Jackson Court also considered the trial testimony of the plaintiff’s expert, Roger Diaz. The Court held that an expert may not testify as to application of the Unfair Claims Settlement Practices Act, what constitutes a general business practice or as to “actual malice.” The Court held that expert testimony concerning the applicable law is not admissible because it does not assist the jury in determining a fact in issue or in understanding the evidence and that such testimony is “superfluous.” Thus, the Court concluded that, as a general rule, an expert witness may not give his or her opinion on the interpretation of the law, the legal meaning of terms within the statute or whether a party committed a prohibited act. The Jackson Court held that an expert can testify to ordinary practices of claims adjustment within the industry and whether the insurer’s conduct conformed, but can not testify as to the legal consequences of that conduct.

The Court likewise prohibited an expert from testifying as to “actual malice” finding that the jury was just as capable as the expert to determine whether the insurer’s conduct demonstrated “actual malice.”

The Court considered but did not rule on a companion appeal by State Farm concerning the ratio of compensatory to punitive damages since it was reversing the verdict and ordering a new trial.


The West Virginia Supreme Court of Appeals has recognized that the attorney-client privilege and attorney work product doctrine apply in first party “bad faith” cases in State ex rel. Allstate v Madden, (No. 31392, W.Va., filed May 18, 2004). In granting a Petition for Writ of Prohibition presented by this firm, the Court specifically acknowledged that where the interests of insured and insurer are in conflict, the filing of a first party “bad faith” claim does not automatically preclude the company raising the privilege or the work product doctrine as a defense to discovery. The issue arose when Judge Madden, sitting in the Circuit Court of Marshall County, ruled that Allstate had no privileges after an insured filed a “bad faith” claim.

The Court also outlined for the first time the manner in which a party may argue for the application of the crime-fraud exception to the attorney-client privilege in order to overcome the privilege. In order to apply the exception, a party must demonstrate that an adequate factual basis exists to support a reasonable person’s good faith belief that an in camera review of privileged materials would produce evidence to render the exception applicable. This prima facie showing, the Court held, must be through non-privileged evidence, unless the court has not made a preliminary determination as to the privileged status of the disputed materials. This is a discretionary decision by the trial court, the Madden Court held.

Moreover, the Court held that only when the evidence establishes that the client intended to perpetrate a crime or fraud and that the confidential communications between attorney and client were made in furtherance of such crime or fraud can the exception compel disclosure of otherwise privileged materials. The Court did not answer the question, however, as to the level of proof necessary for a party to meet the prima facie initial showing.

Finally, the Court held that in a “bad faith” claim, attorneys employed by the insurer may be subject to deposition. However, if the insurer asserts a privilege to any question posed and either a motion to compel or motion for protective order is filed, the trial court must conduct an in camera proceeding and make an independent determination of the status of each communication.


The Superior Court of Pennsylvania has held that post-litigation conduct, including the conduct of an insurance company in defending itself in a bad faith claim, is admissible as evidence of “bad faith.” The Court so ruled in Hollock v Erie Ins. Exchange, 842 A.2d 409 (Pa. Super., 2004), when it upheld a $2.8 million punitive damages award against Erie arising from a first-party “bad faith” claim.

Plaintiff Hollock was a named insured under a policy issued by Erie which carried $500,000.00 per person/$1 million per accident coverage for uninsured and underinsured motorist coverage. After settling a tort claim, the plaintiff presented an underinsured motorist claim. It is alleged that the Erie adjuster mislead claimant’s counsel as to the amount of policy limits, failed to request an independent medical examination, failed to investigate the plaintiff’s wage loss claim, and challenged the plaintiff’s claim based on causation. Ultimately the case was arbitrated with the plaintiff receiving an award of $865,000.00, approximately 29 times the amount of Erie’s settlement offer.

Thereafter, the plaintiff sued Erie for “bad faith” alleging failure to investigate, process and satisfy her claim within a reasonable time following notice of the claim. The trial court award compensatory damages, including attorney’s fees, in excess of $275,000.00 and awarded punitive damages of $2.8 million. In support of its decision, the trial court provided 169 findings of fact, 5 of which were highlighted as “an objective illustration of Erie’s disingenuous attempt to handle Ms. Hollock’s UIM claim.” Those findings included that the adjuster failed to follow up with and intentionally ignored information provided by plaintiff’s counsel and the plaintiff’s employer; that Erie constructed a “ruse” in order to allow it time to place the plaintiff under surveillance; and that the adjuster mislead plaintiff’s counsel regarding coverage. These, the Court found, demonstrated Erie’s “reckless” conduct. On appeal, Erie argued that its conduct in defending itself in the bad faith litigation should not be admissible, which the Superior Court rejected finding that the “broad language” of Pennsylvania’s bad faith statute was designed to remedy all instances of bad faith conduct by an insurer, whether occurring before, during or after litigation. The Court, however, refused to extend its holding to discovery practices finding that the exclusive remedy provided in the Pennsylvania Rules of Civil Procedure would suffice. The Hollock Court specifically found that Erie’s conduct during the litigation of the bad faith claim were actions characterized as “an intentional attempt to conceal, hide or otherwise cover up the conduct of Erie employees” which it defined as a “blatant attempt to undermine the truth finding process.”

In reviewing the punitive damages award, the Court deferred to the trial Court’s finding that characterized Erie as “a company run [amok], whose supervisory personnel sanctioned deceit in the service of a corporate belief that it is acceptable to tell a little lie so long as no one really gets hurt.” Therefore, the Court upheld a 10 to 1 ratio of compensatory to punitive damages which it justified because of “Erie’s reprehensible conduct, its significant wealth, and the limited compensatory award.”


Insurance adjusters may be individually named as defendants in actions brought under the Unfair Trade Practices Act. The West Virginia Supreme Court literally construed W.Va. Code §33-11-2(a) which prohibits any “person” from engaging in an unfair method of competition or an unfair and deceptive act or practice in the business of insurance. “Person” is defined as any individual, company, insurer, association, organization, society, reciprocal, business trust, corporation, or any other legal entity, including agents and brokers. The Court held in Taylor v Nationwide Mut. Ins. Co. and Tarley, (No. 31154. W.Va., filed November 21, 2003), that the definition of “person” is clear and unambiguous and therefore concluded that individual claim adjusters fall within the scope of the Unfair Trade Practices Act. As a result, the Court held that a cause of action exists in West Virginia to hold a claims adjuster employed by an insurance company personally liable for violations of the UTPA.

In a footnote the Court held that the opinion does not address whether such a cause of action exists with respect to non-employee, contractual or independent adjusters. Justice Maynard, who delivered the majority opinion of the Court, also took the opportunity to include as a footnote that he, separate from the majority, does not believe that a private cause of action by a third-party should exist under the Unfair Trade Practices Act, arguing that remedies under the Act should be limited to administrative remedies.


In deciding a case of national first impression argued by this firm, the West Virginia Supreme Court held in Martino v Barnett, et al., (No. 31270, W.Va., filed March 15, 2004), that an exception to the Gramm-Leach-Bliley Act and the Privacy Rule of the West Virginia Insurance Commission shall apply when a claimant or counsel attempts to obtain information from an insurance company that would otherwise fall within the privacy protection under the Act or Rule. Trial Courts, however, have a right and a duty, the Court held, to fashion Protective Orders which limit access and to uphold principles of non-disclosure based upon attorney-client privilege and/or attorney work product “immunity.” The Court further held that an insurance company is obliged to release non-public personal information in response to discovery under the judicial process exception under the State Privacy Rule, provided that the insurance company has had the opportunity to inform the Court when the information is either unnecessary or non-disclosure is warranted on other grounds.

Martino was presented to the Court by certified questions from the Circuit Court of Harrison County when Nationwide refused to provide non-public personal information about its insured to a third–party claimant. Nationwide argued that to release information about its insured, including her home address, would violate the provisions of the Gramm-Leach-Bliley Act, 15 USC §§6801 to 6809 and the West Virginia Insurance Commission’s Privacy Rule, 114 CSR Series 57. The Court based its decision on a judicial process exception which permits financial institutions - which by definition includes insurance companies - to release non-public personal information “to comply with Federal, State or local laws, rules and other applicable legal requirements; to comply with a properly authorized civil, criminal or regulatory investigation or Subpoena or Summons by Federal, State or local authorities; or to respond to judicial process or government regulatory authorities having jurisdiction over the financial institution for examination, compliance or other purposes as authorized by law.”

The Martino Court found there should be no limitation to the application of the term “judicial process” in the exception and therefore concluded that both the Federal statute and the State Privacy Rule allow the use of any judicial process expressly authorized, whether by way of discovery or for any other purpose, to obtain information from an insurance company relevant to the proceeding to which the judicial process relates that would otherwise fall within privacy protections. The Martino Court however, held that access to information a claimant may seek is not without restriction and indicated that trial courts must balance the interests at stake and fashion Protective Orders which limit access to necessary information only. The Martino Court specifically held that while the exchange of information is inherent in civil law, the judicial process exception should not provide a license to “undercut the expressed interests of Congress in protecting the privacy of consumers and financial information.”


In considering whether an insurance company appropriately asserted the attorney-client privilege or attorney work product doctrine, the West Virginia Supreme Court has set forth the following procedure involving the discovery of documents contained in an insurer’s litigation or claim file.

1) The party seeking the documents must do so with reasonable particularity;
2) If the responding party asserts a privilege to any specific documents requested, the responding party shall file a privilege log that identifies the document for which a privilege is claimed by name, date, custodian, source and the basis for the claim of the privilege;
3) The privilege log should be provided to the requesting party and the trial Court; and
4) If the party seeking documents for which a privilege is claimed files a Motion to Compel or the responding party files a Motion for Protective Order, the trial Court must hold an in camera proceeding and make an independent determination of the status of each communication the responding party seeks to shield from discovery.

The Court set forth this procedure in State ex rel. Westfield Ins. Co. v Madden, (No. 31579, W.Va., filed February 27, 2004). The issue arose when Westfield objected to providing its claim files asserting the attorney-client privilege, the quasi-attorney client privilege and the attorney work product doctrine. Plaintiff filed Motions to Compel and for sanctions and the Court ordered production of the files as a sanction for asserting the privileges and work product doctrine in “bad faith.” The Supreme Court, however, found that the Circuit Court of Marshall County did not undertake an in camera review of the documents before entering sanctions against Westfield. This, the Supreme Court held, was in error. The Court held that the reason for an in camera review is to determine which, if any, of the documents alleged to be privileged are in fact privileged and held that a party cannot be sanctioned merely because some documents listed in a privilege log turn out not to be privileged. Therefore, the Westfield Court obligated trial courts to hold in camera reviews of privilege logs and to make independent determinations of the privileged status of each document listed. The Westfield Court also permitted trial courts to appoint special masters to review documents.


Martin & Seibert, L.C. is a regional law firm based in Martinsburg, West Virginia. Please visit our main web site at www.martinandseibert.com to learn more about the legal services we provide to business clients throughout the Mid-Atlantic United States.

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